Personal Impressions: NY Seed Investing

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So the trend is absolutely clear. While consumers spend more and more time on mobile versus desktop, when those consumers are on their mobiles devices, mobile app usage is killing it compared to the mobile web.

Smarter and older (J) investors have written about it recently, starting from the great post by Chris Dixon, and Fred Wilson’s response. The gist of it is – 1) this trend will only get stronger, and 2) because of the closed nature of the app stores, the amount of innovation will dwindle.

What the data is essentially telling us is that consumers no longer consider mobile web a separate experience, but almost like any another app on their phones with a separate set of functionalities that happens to be called “Safari” or “Chrome”. And in this new consumer mindset, the mobile web is an app we use quite often. The latest research from Flurry’s annual report shows we use mobile web for 22 minutes a day on average. The only other “app” we use more often is Facebook, where we spend 24 minutes a day. And if tack on the time spent on Facebook’s mobile browser – there is probably another nice chunk of time spent consuming mobile web.

So – shouldn’t the second most used “app” in the world be able to attract at least a few good entrepreneurs who are truly innovating in the space. And what needs innovation? I believe it is tools that make mobile web a more relevant platform – monetization and development. We are still on the lookout for development platforms that can make mobile web more relevant for certain sectors. A good example of that, which I had the ability to see up close at the previous fund I worked at, is Duda Mobile. It doesn’t make sense for every SMB to have their own app, but they do need a searchable mobile presence. On the monetization innovation side, I think the app stores have shown that if there is money to be made, developers will be there.

As opposed to new platform development, or tools for apps, , on mobile web, it is actually quite simple to show that new monetization tools / drivers have been created. When we met Errnio, a company that is creating a whole new category around “gesture monetization”, we found the concept quite unique. Now, after having invested and seen the company execute for the last 3 months, we believe they have the potential to be a real game changer. Gestures around mobile are a very strong form of “intent”, and intent should equal more personalized, relevant and actionable insights. And all of those should make for a more monetizable mobile web where more is being built and developed.

We are continuing to look for more opportunities in this “un” innovative space. If you hear of anything exciting, send our way!

In a really well thought about post a few days ago, Aleph’s Michael Eisenberg explained very analytically why ad-tech has reached a plateau, and why Israel’s talent pool should shy away from the space. Importantly, because Michael is one of the most thoughtful people on the global tech stage, and the investor with the best VC track record in Israel – when Michael talks, people listen.

However, saying that ad-tech has reached an innovation peak reminds me of the notable Yale Economics Professor, Irving Fisher’s, famous 1929 statement, “stocks have reached what looks like a permanently high plateau.” (note: $1,000 invested in the Dow Jones in 1929 would be worth $2,000,000 today).

Now, don’t get me wrong. There is a ton of validity to almost all of Michael’s points, and it would be darn near impossible to refute any of them one by one. However, I am not sure that one has to, in order to give perspective on the argument as a whole.

There are three major trends around content, reach, and consumption that make the peak of innovation for ad-tech nearly impossible.

Global content production and consumption is on a rocket ship trajectory. It has never been easier to become a content creator / publisher (blog, twitter etc), and it has never been easier to access that content (mobile, global data proliferation).

The platforms via which we consume the most content are constantly changing. Just last week, GWI showed that Tumblr and Instagram were the fastest growing social platforms, displacing Facebook and Twitter. One could argue that Snapchat, which is growing faster than both Tumblr and Instagram combined, is quickly becoming a new type of publishing platform in its own right.

And most importantly – there is currently no other scalable way out there for monetizing your audience other than advertising.

So with more content, more audience, more (and rapidly changing) platforms, and no other ways of monetization – can ad-tech really plateau?

In my humble opinion, how we define as ad-tech will dramatically change over the next few years, but the innovation in the space will remain.

It is true – new ad formats or ad units will no longer be venture backed businesses. But engines that can automate performance marketing campaigns, and deploy thousands of these ad formats, just might.

Yes – new ad networks are bringing only incremental improvements, and will therefore continue to see declining margins and share prices. And, rightfully so – VC demands will significantly increase before they deploy dollars into this space. But, what about advertising businesses that decide to flip the traditional model upside down and actually own the audience themselves? Just this week Outbrain released their own version of this thought process, and there is no reason why much more innovative variations on this will come in the very near future.

It is true, looking at the existing paradigms in ad-tech, information is “nearing perfection” as Michael Eisenberg describes it. But how are we exactly defining information? Do we think that we have perfected audience understanding, context and personalization? Will the data sources we consider relevant today, continue to be relevant when wearables and connected homes turn commonplace? Projects such as GoogleNow, and companies like Gravity and Dynamic Yield are just on the beginning of this innovation curve. Whether we have been calling these companies “ad-tech” is inconsequential – they are helping parse and serve audiences the right content, at the right time, which fits my personal definition of ad-tech.

So – can or should the best engineers in Israel be solving more important problems to the human race, than improving the world of content and advertising? Probably. I have always thought that the great minds leaving the Technion, MIT and Stanford are spending way too much time on ad-tech, marketing / sales funnel optimization, gaming etc. But the real question a brilliant entrepreneur or engineer should ask themselves is “where are there complex problems that create significant opportunities to dramatically improve large and sustainable markets?” And to that question, whether the next innovative solutions are easy to imagine, or hidden to the “naked eye”, the digital advertising market will continue to be a space where the answer is – absolutely.

In a world where “starting-up” is cheaper than ever – all you need is yourself, a few talented friends, and a supportive wife / husband – avoiding common mistakes is as valuable as actual capital. After a recent conversation with Mark Gerson (founder of GLG), I thought it would be valuable to highlight the top 5 statements we hear from entrepreneurs that most likely show that you are thinking about growing your business the wrong way.

1. X is on my advisory board

As a general rule, your advisory board makes little to no difference in the development of your company. The simple reason being – advice doesn’t build a business – executing, iterating and spitting blood does. Therefore, the common statement that any investor has heard over and over again – holds very little sway. As a matter of fact, I would rather an entrepreneur spend time building the business than recruiting advisors. An advisor is only a positive for the business if the following two things occur: He/she serve a very specific purpose of moving the business forward (sales, marketing etc) and such responsibility is clearly articulated in their “advisor documents”. As an entrepreneur, you always try to bring the best people close, but it is imperative not to spend time bringing on advisors for “show”, and when the resources are so thinly spread to spend every minute focusing on substance.

2. Our technology is very complex and patent pending

People don’t buy technology, they buy simple business applications. It is uninteresting to hear how complex your technology is, if a moment before you aren’t able to articulate very simply how it will change someone’s life for the better. And the most complex things are amazingly simple. Uber gets me from point A to point B faster and more conveniently. The dynamic pricing engine and algorithms directing vehicles to passengers across a city is an enabler, but it no way what interests me as a consumer, and therefore shouldn’t interest me as an investor. Every company should think about whose life they are making easier and how first, and only then take pride in the technological complexity necessary to solve that problem / pain-point.

3. We are a strategic asset for Facebook / Google

Whenever I hear someone is a strategic asset to someone else in the early stage, all I hear is that they are not building a viable and valuable business themselves. Let’s leave it up for Google and Facebook to worry about what is strategic for them, and focus on building something that is strategic for your customers. If it will be valuable for enough customers, it will start becoming strategic for Google and Facebook.

4. Our business model revolves around monetizing big data

When an entrepreneur says this, it essentially means they don’t have a business model. Google and Facebook monetize data through different forms of advertising; Palantir monetizes data through intelligence insights and reports. The amount of startups that have the capacity to execute on a product roadmap, acquire customers and grow exponentially, while “monetizing data on the side” are close to zero. The general case is that unless the data you collect is immediately valuable to someone, your business model is currently not monetizing data. And almost every business should have a business model J. There are examples (the outliers), such as Facebook, twitter or Pintrest who really did not have a business model until they reached massive scale. And it is those few businesses who have forever skewed the thinking of first-time entrepreneurs. Businesses are built on revenue, and every company should have a clear path to it (and then profitability) in its roadmap.

5. Our market size is $20 Billion dollars and we have no direct competition

There are no markets without competition, and there are very few addressable markets that are immediately billions of dollars large. For starters – if there isn’t competition, your market isn’t interesting. And if you still think there isn’t competition, you are just not defining competition properly. Competition is anyone vying for the same dollars / piece of the pie that your business is vying for. Plain and simple. I don’t care how you as a company define yourself, the question is – who will you be battling in next year’s budget decisions.

Regarding market size – markets are actually divided into many micro-markets which you as a startup will be trying to tap. The fact that the big data market is $50Bn a year means nothing about your market as a company. The real questions you should be asking yourself when thinking about market size are the same questions you should be asking about your competition – whose dollars are you going to get, how many dollars are up for grabs now, will there be more or less dollars in the same bucket next year, and do you have to share them with someone before they end up in your pocket. When an entrepreneur tells me their addressable market is $20Bn, what I am actually hearing is that they don’t understand their market and how people are behaving in it. And what is most interesting when listening to an entrepreneur in the early stages is exactly that – his / her understand of the market they are competing in.

In the world of finance, everyone is looking for “alpha”, with alpha being the return generated by an active manager’s skill and analysis that creates performance above the market. In start-up world, where growth is everything, I think alpha means any factor which increases a venture’s time to market or market penetration.

And with alpha in mind, it has become a trend for early stage (seed, series A or in-between) Israeli companies, especially in digital media to raise money in the States. And I guess this trend makes sense, because in the rough and tough game of growing an early stage start-up into a growth and sales stage company, every little advantage one can get makes a tremendous difference – especially your investor. Your investor should become an integral part of the venture’s family, and if anyone in the family can get you closer to your first beta customer, in front of potential client decision-makers, industry experts, talent to hire or follow-on financing– it just makes a lot of sense to have such a person / entity on board. [1]

So what should entrepreneurs do:

1) Don’t buy into empty promises.

Look through the smoke and mirrors. A lot of investors speak of “business value-add”, but few are actually able to deliver. Do your own due-diligence, ask to speak to a portfolio company or two, and don’t be ashamed to ask for examples where the investor really helped their companies – it should be part of an investor’s DNA, if they can’t give you many examples off the cuff, they probably ain’t doing it.

2) Remember that value add has a price.

Like a good friend of mine always says “it’s very expensive to buy on the cheap”. What that means is that investors with real value-add tend to “charge” for it. Whether it is lower valuation, compensation for a director’s seat or warrants – an investor that brings something more to the table usually charges for it, and if they don’t – see the paragraph above J

3) “Alpha” goes both ways

It is important for Israeli entrepreneurs to know in the back of their minds that for a US investor, an early stage foreign company is more of a liability than an asset. The company is not geographically located in its target market, has a more difficult time hiring talent, and is further away and thus more difficult to communicate with. There are several NY VCs that outright say that the further a company is located from NY, the less likely they are to invest.

So don’t try to battle the above perception, but rather focus on your unique advantages as an Israeli company for you prospective investor. Say that “we think we have a unique and different idea, but we know we are more versatile, and have access to equally able talent at half the price”. Try to emphasize the fact that you have plans to come to the US, but as an early stage company there are distinct advantages to being able to run almost twice as long on the same amount of cash as a company in the Valley or NY.

Every piece a founder adds to the venture’s complex puzzle should contribute alpha- finding the right investor is just another piece of that puzzle.

[1] The trend has come such a long way that Israeli investors are trying to emulate those exact characteristics, but stay locally relevant. UpWest and Elevator are two accelerator programs whose claim to fame is providing that “alpha”, and I hear of more and more Israeli VCs bolstering their business development connections in NY and the Valley.